To The Moon

What is this about the prison stock GEO?

Michael Burry’s portfolio - noted the increase of his holdings for GEO

Geo Group Inc came to prominence when it became the only holding bought by Michael Burry (Scion Asset Management) in Q2/2022. Here is a news extract from Reuters:

NEW YORK, Aug 15 (Reuters) - Scion Asset Management fund manager Michael Burry, who rose to fame with timely bets against housing ahead of the 2008 financial crisis, in the last quarter dumped a dozen bullish positions and replaced them with a new stake in prison company Geo Group Inc(GEO.N), according to filings released on Monday.

Shares of Geo Group rose 12% on Monday, the largest one-day rally in the company since June 2021, according to Refinitv data. At current prices, Burry's position is worth approximately $3.9 million. Shares of the company, which has a market value of $852 million, are down 1.6% for the year to date.

Source: https://www.reuters.com/business/big-short-fund-manager-burry-dumps-portfolio-buys-prison-stock-2022-08-15/

Who is Michael Burry?

For those who are not familiar with Michael Burry, you should catch the movie “The Big Short” where Christian Bale played Michael Burry who made great returns after the 2008-09 market crash. He took advantage of the bubble arising from subprime and credit swaps.

Movie Poster of the movie “The Big Short”

This is extracted from Wikipedia on his legendary returns:

During his payments toward the credit default swaps, Burry suffered an investor revolt, where some investors in his fund worried his predictions were inaccurate and demanded to withdraw their capital. Eventually, Burry's analysis proved correct: He made a personal profit of $100 million and a profit for his remaining investors of more than $700 million.[6]Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500, widely regarded as the benchmark for the US market, returned just under 3%, including dividends over the same period.

Thus, it became intriguing when one of my most respected investors emptied his portfolio and bought only GEO in Q2/2022. In Q3/2022, he increased his stake by another 302%. This caught my interest as Burry more than doubled down for this business. So, who is GEO?

Background of GEO

This is taken from Yahoo Finance about GEO:

The GEO Group, Inc. (NYSE: GEO) is a leading diversified government service provider, specializing in design, financing, development, and support services for secure facilities, processing centers, and community reentry centers in the United States, Australia, South Africa, and the United Kingdom. GEO's diversified services include enhanced in-custody rehabilitation and post-release support through the award-winning GEO Continuum of Care, secure transportation, electronic monitoring, community-based programs, and correctional health and mental health care. GEO's worldwide operations include the ownership and/or delivery of support services for 102 facilities totaling approximately 82,000 beds, including idle facilities and projects under development, with a workforce of up to approximately 18,000 employees.

Historical performance of GEO from 1990s from TradingView

Financials of GEO by TradingView

News about US Crime Rates (1st Jan 2023):

The United States ranks at 129th with a score of 2.44, marking the country's score "low." Just above the U.S. is Azerbaijan, and just below is Brazil.

“Civil unrest continues to be the primary driver of the deterioration,” the GPI report says about the U.S., noting rises in the political terror and political instability categories. “However, there were also significant improvements in indicators across all three domains, with largest being in the UN peacekeeping funding indicator.”

Source: https://www.usatoday.com/story/life/2023/01/01/what-safest-place-world-live/10427688002/

From the records, the crime rate seems to be high and the US has recorded 600+ cases of mass shootings in 2022 alone.

Past years’ performances of GEO:

Summary of the last 10 years’ performances

From the info involved, we can have the following observations:

• EPS has been dropping since high of 2019 at 1.92
• Revenue has been dropping since the high of 2.4B (2019)
• Gross profit stands at 25.5% (10 year median)
• The dividends per share fell to a 10 year low of $0.25 in 2021.
• P/E of 17.2 looks to be relatively affordable.
• FCF stands at 10 year median of 7.1%

Now, let us take a look into the income statement, balance sheet and cash flow statements.

Income statement for last 10 years

Balance Sheet for last 10 years

Cashflow statements for last 10 years

Other observations:

• Interestingly, the income tax has been increasing $123M (2021) and $149 (TTM).
• Net income dipped into $77M (2021) and $80 (TTM) compared to the $100++ million in the previous years.
• FCF has been increasing for the last few years
• Current Assets have been more than current liabilities.

My conclusion

From the above, I will still require more convincing for GEO before investing though crime rates seem to be a on rise. We would need to do due diligence into the quarterly earnings and more, over a longer period of time before we understand the workings of the business.

Unfortunately, GEO doing well does imply that there is more incarceration in the USA. This should be on a downward trend. With the coming recession, we could “expect” desperate times pushing more to take on desperate measures.

@TigerStars

$Geo Group Inc(GEO)$